Pandemic Response: Considerations From Fortune 500 Compensation Committee Chairs

Tasked with rewarding and incenting executive leadership appropriately and in keeping with the company’s strategy, today’s compensation committee faces challenges on a variety of fronts, including the highly volatile stock market and uncertainty regarding the nation’s health, economic, and business conditions resulting from the COVID-19 pandemic for the remainder of 2020 and beyond.

NACD, along with Farient Advisors and Weil, Gotshal & Manges, recently convened 50 Fortune 500 compensation committee chairs for a meeting of the NACD Compensation Committee Chair Advisory Council. The delegates represented companies across various industries, and the companies they serve have been affected by the crisis in an uneven fashion. But whether a company is experiencing a boom or is going through a severe contraction, a steadfast board focus on ensuring long-term viability remains critical.

Early Implications on Executive Pay
Even with the underpinning of fundamental good governance, compensation committees are challenged to deploy the right tools to meet both short- and long-term objectives. Multiple delegates noted that while many of the measures that can be taken are reversible, the cultural and shareholder ramifications will live on. Delegates discussed board actions for all of the elements of compensation:

• Reduce base salaries. One delegate’s committee took swift action on compensation, implementing a 5 to 10 percent pay cut for executives, and a 20 percent pay cut for directors.

• Defer cash compensation. A delegate noted that their board is deferring 20 percent of pay for salaried employees, which will be paid out next year with a small interest payment.

• Give stock in lieu of cash. Exchange cash salary for stock in order to preserve cash.

The discussions also focused on the potential changes that the crisis might bring to long-term executive compensation practices. While delegates pointed out that patience is a useful tool, they also shared concerns over short-term market volatility and issuing stock when prices are depressed. As prices recover, grants made during the crisis could result in a perceived “windfall of compensation” for executives. Several delegates suggested taking a 30-, 60-, or 90-day average for stock-valuation purposes, rather than using the value on the date of the grant, though clear guidance on when the clock starts for these averages is hard to come by.

Discretion (manual adjustments to final pay outcomes) should be used judiciously by compensation committees. “In an environment where we can’t reasonably say what the future holds, we are thinking about the short, medium, and long term in decisions we are making now,” said one delegate. “This is why discretion is so important. It offers flexibility. The compensation committee is in the best position to assess what is right and what is fair.”

For director compensation, many delegates struggled with the difference between stock price used for executive grants made pre-crisis and the director grants made mid-crisis. “Many of us granted shares to executives in February at two or three times higher than the upcoming director grants in May,” commented one delegate. One remedy offered by Robin Ferracone, CEO of Farient Advisors, is to use the same price for directors as the earlier grant to executives: “If employees were granted stock at one price and the price now differs for directors, you can use the executive grant price to determine the number of shares a director should receive, essentially using the same price to translate value in shares.”

Crisis Strategies for the Compensation Committee
Having an established playbook that compensation committees can work from but also make adjustments to in response to changing conditions can help bring stability and order to their discussions.

Compensation chairs should consider what issues need to be addressed immediately because of their urgency, which questions are better left to the midyear discussions as the situation plays out, and which decisions are best handled at the end of the year with the benefit of full perspective. Delegates highlighted the following items for committee focus:

1. Protect the quality of decisions. In any crisis, there is a tension between acting swiftly and acting with complete information. One director opined, “It’s not the time to rush and take actions and panic—that may bite us in the future. Rushing to deal with the series of comp issues that affect an important subcomponent is something you should think long and hard about.”

2. Use your compensation philosophy as a guidepost. As one delegate thoughtfully noted, “Get out your comp philosophy and principles. Keep with them. That lens will serve us well as we come out of this.”

3. Use scenario planning to quickly course correct. Consider not only what the right thing to do for the business is right now—such as pay adjustments—but also that action’s long-term impact on the strategy. “It’s important to think about the potential impact of granting a lot of equity right now; we could see share dilution and deplete our share reserve quickly,” one delegate observed.

4. Coordinate closely with other committees. The crisis is impacting all facets of the company and the board, making open communication with other committees more important than ever. One delegate said, “My early observation is that committees and boards are becoming extremely collegial and making better decisions as a group and leaning on each other to get to the right inclusion.”

A Time to Demonstrate Leadership
Among the environmental, social, and governance (ESG) factors, the S (for social) currently stands out the most for compensation committees. The committee must consider how to continue to motivate and reward behavior consistent with the company’s culture, and many are using the crisis as an opportunity to further align with their stakeholders, especially employees. Concern for workers’ safety is paramount, but mental health is also top of mind during the crisis.

Delegates pointed out that in some instances, this is bringing organizations closer together. In some notable examples, executive teams, directors, and employees themselves are contributing to employee emergency funds to support their colleagues in their time of need.

Strong, compassionate, and empathetic leadership clearly matters more than ever. Now may be a time for high-performing CEOs to impress outside stakeholders through action in the ESG area. “I think that ‘tier one’ CEOs are doing exactly what the ESG pundits seek—that is, demonstrating leadership on corporate purpose, and focusing on long-term sustainability of the organization. Let’s see if that gets recognized,” said one delegate.

Model Your Values
Speakers and delegates both underscored that while this is a time for making the hard decisions—from layoffs and furloughs to reductions and deferrals—it is important to note that being forthright in communications and honest about what the company can and cannot do can make the difference between success and failure with stakeholders, including employees.

“It may sound counterintuitive, but talking to HR, employee engagement is increasing because of our communication,” one delegate said. Honest communication can lead to increased engagement, retention, and goodwill in the communities where employees live.

Howard Dicker, a partner at Weil, Gotshal & Manges, further noted that regulatory filings may be necessary for employee reductions and other material actions taken during this time. “It’s all about transparency about how decisions were made,” Dicker shared. “Investors, in particular, may be more forgiving in this environment, but will want to understand the rationale and process behind the decision.”

In this turbulent time, the role of the compensation committee will be heightened and come under intense scrutiny. The path forward may not be easy to spot or to traverse. As one delegate asked, “What if our assumptions are wrong—that this is more than just a shock for a quarter or two? What framework should compensation committees be using if this level of volatility is the new normal?” Only time will answer that question.

For now, bright spots do exist. Committees and boards are coming together more than ever before, and whether this time is a one-and-done or the start of a new normal, as one delegate said, “We may well emerge from this [crisis] with deeper and greater long-term employee engagement.” Behaviors refined now to survive the COVID-19 crisis may set a standard for new relationships with employees, customers, suppliers, and investors going forward. And that will take leadership from the top.